Use the following information for questions 74-76.
On January 1, 2019, Luanda Ltd. established a stock appreciation rights plan for its executives. This plan entitles them to receive cash at any time during the next four years for the difference between the market price of its common shares and a pre-established price of $ 20, on 50,000 SARs. Market prices of the shares are as follows: Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2019.
-What amount of compensation expense should Luanda recognize for calendar 2020?
A) $ 0
B) $ 25,000
C) $ 125,000
D) $ 250,000

Question

Use the following information for questions 74-76.
On January 1, 2019, Luanda Ltd. established a stock appreciation rights plan for its executives. This plan entitles them to receive cash at any time during the next four years for the difference between the market price of its common shares and a pre-established price of $ 20, on 50,000 SARs. Market prices of the shares are as follows:  Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2019.
-What amount of compensation expense should Luanda recognize for calendar 2020?
A) $ 0 
B) $ 25,000 
C) $ 125,000 
D) $ 250,000

Quizplus · Accepted Answer

Luanda should recognize compensation expense related to the plan over the four-year vesting period. In 2019, no expense would be recorded since the plan was established on January 1, 2019. In 2020, one-fourth of the SARs will have vested (50,000 / 4 = 12,500). If the market price of the shares is $30, then the intrinsic value (difference between the market price and pre-established price) would be $10 ($30 - $20). Therefore, the compensation expense for 2020 would be $10 x 12,500 = $125,000.

Use the Following Information for Questions 74-76